Oppenheimer Asset Management, Inc.

There is a new President in the White House, and we all have to wish him well as he tries to deal with the multiple issues that confront the nation.

On the economy and the markets, there was little to get positive about last week. Financial stocks again were hit; earnings numbers were not generally good; the report showed initial unemployment claims again soared. Overall the Dow was off 2.5%, the S&P 2.1%, the Nasdaq 3.4%. Transport stocks were especially hard hit, down almost 6% on the week and already down over 16% since the start of the year. Overseas, markets did even worse. European stocks tumbled 8.7%. Asian stocks were off 5.1%, with Japan down a more modest 4.5%.

As if this were not enough, the 10-year Treasury in the US dropped dramatically, as the yield rose to 2.62% from 2.32% last week. Oil futures jumped about $10 a barrel in New York. The dollar was mixed.

The economic data, as noted, make grim reading. Housing starts fell 16% in December, the lowest level on record. Building permits in the same month declined 11%, also to a record level. FHFA housing price index fell another 1.8% in November. Mortgage applications dropped 9.8% for the week ended January 16th, led by a slump in re-financings as borrowing costs rose from record lows. In short the housing market slump continues to worsen.

Most troubling, initial unemployment claims for the week ended January 17th increased 62,000, matching the highest level in 26 years. The announced layoffs in the press last week showed that the trend continues to worsen.

Some optimism surfaced last Friday that the new stimulus package may be ready soon. It will, of course, take some time before it passes Congress and is signed by the President. News reports indicate that there is also a significant adjustment in financial market regulation in the works. This will lead to uncertainty until its details are known.

The data from abroad are just as bad as in the US. Nationwide department store sales in Japan in December were down 9.4% YOY. Moreover consumer confidence continued to fall in Japan in December. Japanese machine tool orders were off almost 72% YOY in December. Their leading indicators index was also down in November.

In Europe the story is only marginally less bad. Industrial new orders in November were down 26% for the EC as a whole. The PMI survey did, however, show basically flat in January. Some of the big countries did not fare so well on this measure.

There is no question that the global recession is continuing and even deepening. Inflation does appear to be subsiding everywhere, and the risk of deflation is very real. A positive in all this, though is that despite the pile on of bad news in the US and around the world, the S&P has traded sideways, albeit within a wide range, for some months now. YTD numbers mask this important trend. While there are worries that a new stimulus package may be slow in coming and might not even be enough, there is a commitment by the new Administration in Washington to do what it takes to get things moving again. The Federal Reserve has a similar commitment. No one can forecast the future in these record-breaking times, but the market is giving us a positive signal in its sideways movement – again despite the bad economic news.